Could China be actually one of the few countries in the world where the politicians have skin in the game? If they fuck up, they got 1 billion of people that will be angry, prostesting and trying to take them down. If democracy is implement, the current leaders will probably be imprisioned, maybe even executed. They got a huge incentive to do a good job
Global Macro Trading Journal
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A very good older article by Taleb
https://www.edge.org/conversation/nassim_nicholas_taleb-real-life-is-not-a-casino
A typical intelectual yet idiot will read this and 'this is obvious' and then talk shit about an upcoming IPO or bitcoin. Focusing on probability instead of payoffs
"Consider the following statement. "I think that this book is going to be a flop, but I would be very happy to publish it." Is the statement incoherent? Of course not: Even if the book is very likely to be a flop, it may make economic sense to publish it (for someone with deep pockets and the right appetite), since one cannot ignore the small possibility of a handsome windfall or the even smaller possibility of a huge windfall. We can easily see that when it comes to low odds, decision making no longer depends on the probability alone. It is the pair, probability times payoff (or a series of payoffs), the expectation, that matters. On occasion, the potential payoff can be so vast that it dwarfs the probability—and these are usually real-world situations in which probability is not computable"
"When I discuss the impact of the highly improbable ("black swans"), people make the automatic mistake of thinking that the message is that these "black swans" are necessarily more probable than assumed by conventional methods. They are mostly less probable. Consider that, in a winner-take-all environment, such as the arts, the odds of success are low, since there are fewer successful people, but the payoff is disproportionately high. So, in a fat-tailed environment (what I call Extremistan), rare events are less frequent (their probability is lower), but they are so effective that their contribution to the total pie is more substantial."
https://www.edge.org/conversation/nassim_nicholas_taleb-real-life-is-not-a-casino
A typical intelectual yet idiot will read this and 'this is obvious' and then talk shit about an upcoming IPO or bitcoin. Focusing on probability instead of payoffs
"Consider the following statement. "I think that this book is going to be a flop, but I would be very happy to publish it." Is the statement incoherent? Of course not: Even if the book is very likely to be a flop, it may make economic sense to publish it (for someone with deep pockets and the right appetite), since one cannot ignore the small possibility of a handsome windfall or the even smaller possibility of a huge windfall. We can easily see that when it comes to low odds, decision making no longer depends on the probability alone. It is the pair, probability times payoff (or a series of payoffs), the expectation, that matters. On occasion, the potential payoff can be so vast that it dwarfs the probability—and these are usually real-world situations in which probability is not computable"
"When I discuss the impact of the highly improbable ("black swans"), people make the automatic mistake of thinking that the message is that these "black swans" are necessarily more probable than assumed by conventional methods. They are mostly less probable. Consider that, in a winner-take-all environment, such as the arts, the odds of success are low, since there are fewer successful people, but the payoff is disproportionately high. So, in a fat-tailed environment (what I call Extremistan), rare events are less frequent (their probability is lower), but they are so effective that their contribution to the total pie is more substantial."
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Brazilian stock index during the 80s inflation and hyperinflation. Stocks can be incredibly poor inflation hedges sometimes. This amounted to a -95% real loss to investors, over the same time frame, fixed income (as measured by the real return on savings accounts) produced a -44% return.
Fixed income was a safe haven while stocks lead to a loss of almost all of investor capital.
There is a HUGE risk in engaging in "Buffettism". That is, educating yourself about investing from reading Warren Buffett and thinking it applies to any market outside the US. Buffett regularly scorns cash and touts stocks, he says cash is a guaranteed loser because of inflation but stocks tend to keep up with it. Maybe that is true over super long periods of time, but as Brazil shows, things are more complicated than that. Underperforming for half a decade or more could lead to
-Hedge fund closure if OPM is involved
-Lack of discipline with the investing plan if only personal funds are involved
I plan to widen my macro studies to include Venezuela, Russia, Japan and many other countries (pretty much any that had an interesting macro development in it). I'm getting some macro data from tradingeconomics and Im looking to run some portfolio tests in it. This is something I should have done a long-time ago. Almost every major macro backtest I learn something new (In Greece it was how massive the bond losses were, as well as the stock market losses. In Brazil, how bad stocks were as inflation hedges, at least in terms of Max DDs, eventually they came ripping back)
As well as I see people make macro comments that seem to contradict these major episodes, if I build a data base (both electronic and mental) of major macro events, I will be able to avoid mistakes and make better decisions (as well as understand financial markets better)
As well as I see people make macro comments that seem to contradict these major episodes, if I build a data base (both electronic and mental) of major macro events, I will be able to avoid mistakes and make better decisions (as well as understand financial markets better)
Another thing that I'm doing is getting more "formal" training in math, accounting, statistics etc. I always learned things as I needed them and found that connecting to the real world (through practice, trial and error, trading) yielded me more lessons and more skill than academic type training. Yet, I dont think academic training is useless, sometimes they teach useful things and learning a few tricks can be helpful if they are applied by people with experience (My use of the Gordon Dividend formula to estimate the effect of Trump on the stock market was one of such tricks). So I'm doing some courses on cousera.org lately
A few months ago Tepper started the theme of "the globe is having a syncronized growth period for the first time since the financial crisis, dont short equities. Europe is a good place to buy stocks", I posted the videos and pretty much agreed with the theme. Now, it seems that every single person is bullish Europe and is talking about global growth. They are having to pay up in prices for not being ahead of the crowd.
This might become part of my convexity system: buy when a theme in unpopular/neutral, avoid buying when its popular.
This might become part of my convexity system: buy when a theme in unpopular/neutral, avoid buying when its popular.
I say might because its dangerous to incorporate contrarianism into a convexity system. Yet it seems necessary as if you dont do it, you might start gambling, buying everything, believing every story etc. Again, it comes back to the balance between optimism and pessimism. The yin and yang of investing
Interesting backtest that I run just now. 100% long US stocks since Jan 1948 to Dec 2016
Monthly metrics
Sharpe Ratio 0.0966
Sortino 0.1260
MAR ratio (CAGR/Max DrawDown) 0.1403
Max DD -51.59% (real)
Total Gain 14,431%
100% US stocks when unemployment is bellow 7%, 100% T-Bills when its above or equal to 7% (I`m calling this the "Zero Hedge System")
Sharpe 0.0298
Sortino 0.0345
MAR ratio 0.0759
Max DD -56.51% (real)
Total gain 1,820%
Awful performance. The system "shorts" convexity by going to cash when the economy is bad, it gets burned badly on a relative basis because of that.
It would be nice if I had depression data on this but unfortunately the Fed unemployment data starts on 1948. I need to look around more to expand the research. But its pretty neat that because I developed my spreadsheet to backtest portfolios using macro variables as inputs as well
Monthly metrics
Sharpe Ratio 0.0966
Sortino 0.1260
MAR ratio (CAGR/Max DrawDown) 0.1403
Max DD -51.59% (real)
Total Gain 14,431%
100% US stocks when unemployment is bellow 7%, 100% T-Bills when its above or equal to 7% (I`m calling this the "Zero Hedge System")
Sharpe 0.0298
Sortino 0.0345
MAR ratio 0.0759
Max DD -56.51% (real)
Total gain 1,820%
Awful performance. The system "shorts" convexity by going to cash when the economy is bad, it gets burned badly on a relative basis because of that.
It would be nice if I had depression data on this but unfortunately the Fed unemployment data starts on 1948. I need to look around more to expand the research. But its pretty neat that because I developed my spreadsheet to backtest portfolios using macro variables as inputs as well
The Economist talking nonsense about Uber
"
Investors rationalise its valuation by assuming that in the long run it will be highly profitable, with a dominant share of a large market. In 2014 Bill Gurley, a well-known tech investor who was then an Uber director, estimated that the pool of consumer spending that it could try and capture might be over $1trn, with ride-hailing and ride-sharing replacing car ownership. Today many Silicon Valley types think that estimate is too conservative.
But a discounted cashflow model gives a sense of the leap of faith that Uber’s valuation requires. After adjusting for its net cash of $5bn and for its stake in Didi, worth $6bn, you have to believe that its sales will increase tenfold by 2026. Operating margins would have to rise to 25%, from about -80% today.
That is a huge stretch. Admittedly, Amazon and Alphabet, two of history’s most successful firms, both grew their sales at least that quickly in the decade after they reached Uber’s level, and Facebook is likely to as well. But over the same periods these firms’ operating margins show an total average rise of only one percentage point. Put simply, Uber finds it desperately hard to make money. It is not clear that it breaks even reliably across the group of cities where it has been active for longest."
DCF analysis is extremely fragile when convexity is involved. Its actually a very harmful tool for dealing with these sorts of investments. As Taleb says "Understanding is a poor substitute for convexity". One is WAY better off implementing a trailing stop (say "Exit the investment once it is down by 50%") rathern than to try to 'intelectualize' it by doing DCFs, or just looking around for reasons to sell (there are ALWAYS many reasons to sell)
"
Investors rationalise its valuation by assuming that in the long run it will be highly profitable, with a dominant share of a large market. In 2014 Bill Gurley, a well-known tech investor who was then an Uber director, estimated that the pool of consumer spending that it could try and capture might be over $1trn, with ride-hailing and ride-sharing replacing car ownership. Today many Silicon Valley types think that estimate is too conservative.
But a discounted cashflow model gives a sense of the leap of faith that Uber’s valuation requires. After adjusting for its net cash of $5bn and for its stake in Didi, worth $6bn, you have to believe that its sales will increase tenfold by 2026. Operating margins would have to rise to 25%, from about -80% today.
That is a huge stretch. Admittedly, Amazon and Alphabet, two of history’s most successful firms, both grew their sales at least that quickly in the decade after they reached Uber’s level, and Facebook is likely to as well. But over the same periods these firms’ operating margins show an total average rise of only one percentage point. Put simply, Uber finds it desperately hard to make money. It is not clear that it breaks even reliably across the group of cities where it has been active for longest."
DCF analysis is extremely fragile when convexity is involved. Its actually a very harmful tool for dealing with these sorts of investments. As Taleb says "Understanding is a poor substitute for convexity". One is WAY better off implementing a trailing stop (say "Exit the investment once it is down by 50%") rathern than to try to 'intelectualize' it by doing DCFs, or just looking around for reasons to sell (there are ALWAYS many reasons to sell)
I have no idea whether Uber is a buy at $68B valuation but I sure heck know that an invesment philosophy that regulardly uses DCF to get out of investments like this, is quite likely inferior to one that uses tools like trailing stops or that is more intuitive in nature (ex: "I know Jeff Bezos, he is a genius, so I"m not selling"). I'm talking about convexity stocks here, things that have huge monopoly potential (especially when its global potential). For dealing with more stable companies (say a food company that is already mature), then that DCF could become useful